The Value of Life and the Rise in Health Spending

NBER Working Paper No. 10737Issued in September 2004NBER Program(s): EFGAGHEPE

Health care extends life. Over the past half century, Americans have spent a rising share of total economic resources on health and have enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: can we understand the growth of health spending as the rational response to changing economic conditions---notably the growth of income per person? We estimate parameters of the technology that relates health spending to improved health, measured as increased longevity. We also estimate parameters of social preferences about longevity and the consumption of non-health goods and services. The story of rising health spending that emerges is that the diminishing marginal utility of non-health consumption combined with a rising value of life causes the nation to move up the marginal-cost schedule of life extension. The health share continues to grow as long as income grows. In projections based on our parameter estimates, the health share reaches 33 percent by the middle of the century.